When optimising rather than minimising the supply base can pay
Although comparison websites and money saving experts are helping more UK consumers than ever to choose from an array of banks, utilities and financial products, the procurement function is still seen (in some quarters) as continuing to be relatively traditional in its supplier selection.
In the year 2016 when the world is changing faster than ever before, there are valid arguments for procurement professionals to look across the board when it comes to the review of their supply bases.
Indeed, when it comes to reaping the benefits of new services, products and technology, it’s possible that procurement teams could benefit from thinking a little more consumer like.
While a decision to add suppliers in any procurement setting can have major consequences and should always result from a thorough review process, there are good reasons for procurement professionals to consider an optimal, rather than minimal, supply base:
Sense in supply
It has frequently made sense for larger businesses to consolidate their supply base. Mergers and acquisitions, for example, can leave a company with hundreds if not thousands of suppliers, many of whom can overlap in service or product provision. This means that supply base consolidation always has to be a key consideration of any procurement function.
However this does not necessarily need to mean cutting suppliers down to a minimum. There is evidence that excessive movement in this direction can create less than optimum conditions for an organisation and, in particular, the process of consolidation needs to take supply chain risk into account.
In the event of a crisis or natural disaster, businesses can be left in the lurch if their supply base is not sufficiently broad. The 2011 earthquake in Japan and flooding in Thailand saw personal devastation followed by a business impact when many OEMs were left without electronic components and materials after their suppliers’ production sites were affected.
When businesses find themselves without supply at no notice, there are multiple issues. These include how to quickly qualify new suppliers, ensure that these have the capacity to supply equally rapidly and to check on any intellectual property (IP) issues if the older suppliers own the IP on any products.
Forging strategic partnerships is often beneficial in terms of time and cost, but ensuring there are enough of these valuable relationships in place to deal with a host of eventualities is key.
Being over dependent on a narrow base of suppliers can not only stretch those suppliers to the point of capacity but can also lead them into financial difficulties. There are also the potential risks of a limited range of suppliers knowing they have a dominance and maximising this to their advantage.
While public sector buyers cannot exclude a potential bidder on the grounds that they dominate the market, they can assess how busy the supplier is and any issues related to potential capacity.
Ways to mitigate the risks of over-dependency include ensuring the customer owns any IP, setting up clear targets and benchmarks and tailoring the contract to allow the procurement function to tender competitively for any additional requirements or repeat services. The customer should also check that any restrictions in the contract will not undermine value for money.
Innovation and collaboration
A manageable yet broad supply base will enable a range of valuable relationships. Quality supplier relationships can make or break a business, so ensuring that the ones in place are working well is critical, while bearing in mind too few could limit the scope for innovation.
Opening up a wider supply base can help to deepen the number of insights and opportunities and enhance collaboration across the business and supply chain. Effectively connecting all suppliers to the company’s objectives will reap rewards.
Thinking broadly about the supply base can also mean inclusive procurement. This type of supplier diversity is described as actively establishing relationships with a wide range of suppliers, from women owned businesses to ethnic minority and disability based businesses. The arguments for this include the potential for the buyer to extend and improve an organisation’s CSR and PR programmes, drive economic benefits across a wider range of society and open their business up to the possibility of new, innovative commercial solutions.
There is no one size fits all when it comes to establishing a supply base, but broadening enough so that the number of sole source suppliers is kept to a minimum and continuity is optimised is, at the very least, business critical.